It's a bull market & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

It's a bull market & more... 

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In this issue:
» Rogers says it's bull market in oil
» End of India's property boom
» Power woes to intensify
» Goldman prefers China over India
» ...and more!!

 00:00    "It's a bull market"
...says Jim Rogers, one of the world's best known commodities investor, on oil prices. In fact, he expects oil prices to continue to increase over the next 10 years. Bloomberg quotes Rogers saying, "Over the course of time, it's a bull market. While the oil price could fall to US$ 75 or rise to US$ 175, the market will continue to increase over the next 10 years." He has actually indicated that declines in commodity prices (like oil's) from record highs represent a temporary reversal in a bull market that will last for several years. Good for commodity companies, bad for consumers!

  • Also read - Stocks Rogers' buying

     0:20    Of misleading doctrines and more...
    'Early 21st century investment doctrine has and will continue to favor the migration of assets from traditionally long-only styles to the absolute total return approach'. This quote, taken straight out of a recent note by Lehman Brothers and published in the International Herald Tribune, summarises the ills that are plaguing the investment world currently. A Google search for the phrase 'long-only investing' led us to a definition of hedge funds, where they were defined as institutions using variety of 'alternative' investment approaches to the more traditional 'long-only' or 'buy and hold' style. Additionally, hedge funds are dedicated to achieving an absolute-return investment objective that is not index - or benchmark-based. Thus, what the Lehman Brothers note is trying to imply is over time, more and more assets will move into hedge funds and their approach has been the new investment doctrine of the 21st century!

    People like Ben Graham would indeed be turning in their graves. What is surprising that despite disasters like LTCM (Long Term Capital Management), people have still not been able to fathom the risks associated with hedge funds. These firms are known to charge high fees and often have turnovers well in excess of 100% (meaning the entire portfolio changes in a span of one year), all of which leads to huge transaction costs, the very antithesis of sound investing.

    Furthermore, they are also known to employ huge leverage (borrowings to invest), a condition that could amplify their mistakes several fold on the downside. Thus, with structural shortcomings like these, it is indeed difficult to believe how these institutions over the long-term would be able to beat a conservative style of investing that emphasizes margin of safety and minimal transaction costs. In fact, Warren Buffett, one of the best practitioners of the conservative 'long-only' style of investing has also entered into a bet that even the most well chosen hedge fund will not be able to beat returns from a low-cost S&P 500 index fund over a 10 year period. Indeed, taking into account the track record of the man and also evaluating the challenges in the form of huge structural shortcomings that a hedge fund faces, it will be difficult not to side with the master.

  • Also read - Buffett's big bet

     1:35    In the meanwhile...
    Key Asian markets closed strong today. The gainers' list was led by Hong Kong (up 3.5%) and Japan (1.7%). Indian markets were off their day's highs by the closing bell and ended with very marginal gains. Overall, gains in Asia were led by crude oil's biggest plunge (of around US$ 6.6 per barrel to US$ 114 per barrel) in four years, which was a result of increased supplies following BP Plc.'s (Europe's second largest oil company) restarting of flows through a Caspian Sea pipeline. This decline in oil prices has seemingly eased concerns that inflation will accelerate and erode earnings in emerging economies, thereby leading to today's strong gains in Asian equities. European markets are trading weak currently.

     1:59    Is this the end of India's property boom?
    ...seems likely for the time being at least. The property market in India in the last couple of years witnessed an unprecedented boom. Strong growth in the economy and rising disposable incomes of the swelling middle class population made property developers rub their hands in glee as they capitalised on rising demand and consequently escalating house prices. Stocks of real estate and construction companies also reached dizzying heights. And then the global subprime crisis unraveled marking the beginning of a steep decline in house prices and demand for homes. The meltdown in the global stockmarkets impacted the Indian bourses too and real estate stocks were one of the worst hit. By this time, property prices in India had reached their peak and buyers suddenly became wary of buying houses at such unheard of prices choosing gradually to stay on the sidelines till the inevitable fall in prices took shape.

    With inflation nearing the 13% levels consequently leading to higher interest rates and banks being selective with respect to granting credit, demand for homes has slowed down and property developers are now focusing more on developing affordable homes for serious buyers who want to buy homes for residing and not speculation. Does this mean that there will now be resurgence in demand for homes? The Economist in this regard states, "Like so much else, India's property market hinges on confidence. Even when property prices and interest rates fall, buyers will be slow to catch on. House buyers tend to wait for much longer before they think about spending so much money."

  • Also read - Real estate to grow 14 fold in 10 years

     3:04    Nano's moving from East to West?
    West Bengal's loss might be Maharashtra's gains, if Mr. Ratan Tata were to heed to the latter's chief call for shifting its controversial Nano plant to the western state. This comes after Mr. Tata threatened to walk out of Singur (West Bengal) is violence and disruption to the Nano project continued. Well, Maharashtra is not alone in the race to attract Mr. Tata's attention. While Orissa and Uttarakhand have also shown interest, even the West Bengal chief minister has talked about his confidence of the project being continued in his state, despite the violence over accusations of land grab by the Tatas. In the meanwhile, authorities have deployed 3,000 police at the plant site at Singur as protestors are defying a threat of Tatas scrapping the factory. About 30,000 people demonstrated outside the factory yesterday. Time for some re-thinking, Mr. Tata?

  • Also read - Move over BC, AD...

     3:25    India's power woes continue...
    The much-touted ultra mega power projects (or UMPPs), which were said to solve all of India's power problems have in fact been a non-starter. As reported in a leading business daily, even after three years of project approval, states like Orissa, Gujarat, Madhya Pradesh, Chhattisgarh and Karnataka have not been able to finalise location for these projects despite repeated reminders from the power ministry. Readers would do well note that the Indian government has planned a total of 9 UMPPs out of which only 3 have been allotted to far (1 to Tata Power and 2 to Reliance Power). A UMPP is expected to have generation capacity of 4,000 MW and project cost of US$ 4 bn (assumed at US$ 1 m or Rs 40 m per MW). As such, if all the nine UMPPs come up, they should bring in an investment of about US$ 36 bn. However, given the current news flows, this seems a far-fetched dream.

     3:47    ...and you know why Goldman prefers China over India
    According to Goldman Sachs, China is a better investment destination than India right now. It believes that China's cyclical macro-economic environment is less challenging than India's. India's challenges at the macro level include dependence on expensive crude oil imports, high inflation, tight monetary policy, and current account and fiscal deficits. Goldman feels that China has greater flexibility to formulate appropriate policies to meet its challenges as compared to India.

    The investment bank is also of the opinion that the valuations of Chinese equities at 11 times forward earnings and 2 times book value is more attractive than Indian equities at 14 times forward earnings and 3 times book value. However, it is of the opinion that lower crude prices, a good monsoon and high cash balances of Indian mutual funds might still propel the performance of Indian equities in the days ahead.

     04:14    Indian hand in UK's biggest online scam
    A leading business daily has reported that an Indian hacker is being charged with the greatest cyber-heist in history. He has allegedly helped a criminal gang steal identities of an estimated 8 m people in a hacking raid that could ultimately net more than £2.8 bn (around Rs 225 bn or Rs 22,500 crore) in illegal funds. The hacker has reportedly breached UK's Best Western Hotel group's online booking system and has sold details of how to access it through an underground network operated by the Russian mafia. Well, well, well! Call it the right brains in the wrong business?

     04:37    Deflation in inflationary times
    A leading business daily reports that Dominos Pizza, which has nearly 42% share of the Indian organised pizza market, has reduced the price of its basis offering by Rs 10 (22% lower). According to the company's marketing chief, Dominos is not targeting a different segment of customers, but instead is aiming to change the behaviour of the same customer. The new 'Pizza Mania' priced at Rs 35 will replace the earlier 'Funmeal for 4' campaign, wherein four mini pizzas were priced at Rs 45 each. This price cut has been despite the company facing a rise of 7% to 8% in its input costs. Talk about deflation in times of inflation!

  • Also read - Challenges in food retailing

     04:55    Today's investing mantra
    "Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham
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